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Oil Sands Market Valuation Over the Development Cycle
Ross Smith Energy Group, Jan 2006, Pages: 11
We present an alternative method of assessing market valuation for seven Canadian oil sands companies (COS.UN, DCE, OPC, SU, SYN, UTS, WTO) on the basis of enterprise value per estimated recoverable barrel of bitumen. We believe this metric provides a more meaningful comparison for oil sands companies than NAV; however, we caution that while this methodology may provide useful a valuation comparison, we do not recommend it as the only criterion for making investment decisions since factors influence reserve value, project timing, future commodity prices, project-specific risks, and capital and operating costs.
All seven companies are heavily weighted to the Athabasca oil sands of northern Alberta, and their projects are at various stages of development. In the 17 months prior to publish date, share prices of these companies have increased dramatically, excepting the recently listed Synenco.
Why you should read this:
- Since July 29, 2004, share prices of six of the seven companies appreciated between 105% to 576% (as at January 4, 2006), far exceeding the TSE Composite Index and the WTI price over the same period. (The seventh company, SYN, went public on November 15, 2005).
- In our opinion, the factors responsible for this stock-price appreciation include the commodity price outlook, greater global interest in the oil sands, corporate and property acquisitions, and a recent surge of capital investment into the northern Alberta region. The capital influx is forecast by the industry to bring production capacity to 2.7 MMb/d in 2015 from 1 MMb/d presently.
- We believe the run-up suggests the market is accepting more risk by investing in these companies at increasingly earlier stages of their projects. Ironically, as more oil sands projects are proposed, the risk is being elevated by labor shortages, capital cost inflation and tightening regulatory requirements.
- The run-up also suggests the market is not evaluating oil sands companies relative to net asset value (NAV). This is understandable, since these are unique, long-life mega projects built out in multiple stages, and long-term NAV models are extremely sensitive to discount rate and commodity price assumptions.
- In this report we present an alternative method of assessing market valuation of these companies – specifically, enterprise value (EV) relative to recoverable oil sands resources at various stages of development. We believe these metrics render more meaningful company comparisons.
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